Any movement today in either Bank Rate or the size of the quantitative easing programme would have been a major shock.
With 10 year gilt yields up nearly 30 basis points over the last month and five year yields up even more the last month has seen by far the biggest change in longer term interest rates since the steady downward trend that followed the announcement of the Funding for Lending scheme nearly a year ago.
However there has been a negligible movement in three month LIBOR and the market is reacting to a change of mood in the US market rather than any material change to UK fundamentals.
Despite swap rates following gilt yields upwards the cost of fixed rate mortgages has continued to fall over the last month. This says a lot about the margins lenders had in hand and also reflects a much stronger appetite to lend compared to a year ago.
Although the desire to increase lending is being reflected in cheaper mortgages there is little evidence so far of any material relaxation in criteria.
Therefore those who qualified for a mortgage a year ago can now benefit from rates about 1% cheaper but many of those who didn’t will still struggle unless their personal situation has improved for example from increased equity in their property or access to more savings.
However there is an increased willingness amongst the lenders who do not operate a “computer says no” policy to accept good quality applications from borrowers who don’t tick one of the boxes, although this requires the expertise of a broker.
The announcement that the Help to Buy Shared Equity scheme has achieved 4,000 reservations in its first two months is a strong indication that it is already proving much more successful than the alternative NewBuy scheme which has only achieved 2,291 completions in its first 12 months, i.e. up to 31 March this year.
Increased demand on this scale for new build properties will provide a strong incentive for those developers with access to adequate finance to accelerate their planned build programme and only last month Barratt Developments announced that it planned to acquire 40% more plots this year than last.
There will inevitably be a time lag between the current increased demand and increased completions resulting in some upward impact on house prices.
As a result new build completions this year will probably not be significantly different to last year’s but this does bode well for a worthwhile increase in new build completions in 2014 and 2015 especially if the government can address some of the existing planning constraints.
The far better reception given by purchasers with only a 5% deposit to the shared equity scheme than the old style insurance based standard 95% loan to value NewBuy scheme raises some interesting questions about the Help to Mortgage scheme the government is still trying to cobble together to launch on 1 January.
To encourage banks to lend to SMEs on 16 April the EU’s economic and monetary affairs committee voted to reduce the nominal risk that lenders need to assign to such loans citing the rationale that “this is turn will reduce the amount of capital that they must set aside to cover loans that could turn bad, thus making more available for lending.
Under current rules banks have to set aside about eight times as much capital to cover a 95% LTV mortgage as one at 85%. As even a 95% LTV mortgage is a lower risk than lending to SMEs especially now that all high LTV lending is on a repayment basis.
It would make much more sense for the government to persuade this committee, assuming it is the appropriate body, to reduce the nominal risk lenders need to assign to 90% and 95% LTV mortgages.
The government could then save itself the bother of reinventing the wheel with the complex negotiations and expensive legal costs which will be necessary to bring the insurance scheme to market.
It remains uncertain how many lenders will choose to participate in such a scheme but in any case borrowers have already clearly demonstrated they prefer the shared equity solution.
It offers much lower mortgage rates and much lower monthly payments in exchange for giving up 20% of any future capital gain but also avoiding 20% of any loss.
Government intervention should only be considered when there is market failure which there was in 2009. However the private sector reinsurers in this market now have adequate capacity to provide as much cover as the government is planning to offer.
Therefore addressing the cause of the problem in the way outlined above, by amending lenders’ capital requirements, would be a much more sensible response to this problem than continuing with current plans.
What Should Borrowers Do?
As the cost of fixed-rate mortgages, especially 5-year fixes, continues to fall their attraction increases. The type of mortgage John Charcol clients choose is heavily influenced by our advice and the following figures show the proportion of our clients choosing a fixed-rate mortgage, mostly 2 or 5-year fixes in almost equal proportion for their residential property:
• 2011: 54%
• 2012: 56%.
• 2013 to date: 81%.
• May 2013: 86%.
With many borrowers on a standard variable rate now able to save well over 1% by switching to a 5-year fixed rate, and some more than 3%, there is a compelling case for many borrowers to consider a remortgage.
For those who wish to lock into today’s low rates for a longer period one can fix for as long as 10 years below 4%. It is extremely rare for the gap between SVRs and fixed rates to be this wide.
